Working Paper: NBER ID: w27536
Authors: Olivier Wang; Ivn Werning
Abstract: How does market concentration affect the potency of monetary policy? The ubiquitous monopolistic-competition framework is silent on this issue. To tackle this question we build a model with heterogeneous oligopolistic sectors. In each sector, a finite number of firms play a Bertrand dynamic game with staggered price rigidity. Following an extensive Industrial Organization literature, we focus on Markov equilibria within each sector. Aggregating up, we study monetary shocks and provide a closed-form formula for the response of aggregate output, highlighting three measurable sufficient statistics: demand elasticities, market concentration, and markups. We calibrate our model to the empirical evidence on pass-through, and find that higher market concentration significantly amplifies the real effects of monetary policy. To separate the strategic effects of oligopoly from the effects this has on residual demand, we compare our model to one with monopolistic firms after modifying consumer preferences to ensure firms face comparable residual demands. Finally, the Phillips curve for our model displays inflation persistence and endogenous cost-push shocks.
Keywords: Market Concentration; Monetary Policy; Oligopoly; Price Stickiness
JEL Codes: E0; E3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher market concentration (L11) | Amplified real effects of monetary policy (E52) |
| Market concentration (L11) | Responsiveness of aggregate output to monetary shocks (E19) |
| Strategic interactions among firms (L13) | Steeper reaction functions (D43) |
| Steeper reaction functions (D43) | Higher equilibrium markups (D43) |
| Higher equilibrium markups (D43) | Slower passthrough of monetary shocks into prices (E39) |
| Oligopolistic competition (L13) | Longer half-life of price level reaction to monetary shocks (E39) |
| Larger firms (L25) | Lower passthrough of cost shocks (H22) |